College Savings Plan

College Savings Plans are ways in which parents and grandparents can save for a child’s college education so that by the time the child is old enough to go to college the money is available without having to take out any loans. These types of savings plans are called 529 plans and are free from federal income tax. In addition to the federal savings plans, there are state plans as well.

There are two types of 529 savings plans. One of these is a prepaid tuition plan and the other is a savings plan. In prepaid tuition plans you purchase the tuition at the current rate, but the plan will pay the cost of tuition at the rate for the year in which the child attends college. Such a plan may be administered by the state or by individual post-secondary institutions.

Savings plans are like investing in mutual funds. There are age-based options in these plans that are more conservative as the child gets older. You can have risk-based investments in which the funds remain in the account whatever the age of the child for whom you are saving. The principal is protected so that you won’t risk losing your investment as the market conditions change.

The money you place in this type of savings plan is tax free as are the withdrawals you make, as long as these withdrawals go to pay for higher education. You don’t have to pay any taxes on the interest the money earns. The person that takes out this plan remains the account holder even after the child is in college. The benefit of starting a college savings plan when a child is young means that the amount that you have to contribute each month is very low. This makes such a plan a very worthwhile investment for middle and low income families who really do want to provide their children with every possible opportunity.

The name of the beneficiary can be changed on the account, such as in the case of taking out the plan for a child who decides that he/she is not going to college. The money can also be used for any accredited university or college in the country.